Buy Engineers India Limited

Engineers India Limited is a stock which saw significant correction recently. In the past few trading session, the stock corrected when the news of a probable equity dilution through FPO was circulated in the market. Also news of delay in key refinery projects which would result in deferment of earnings resulted in further slip in the stock.

Talking of the performance, due to the cyclical slowdown in the Hydrocarbon market, the company bagged very few orders as compared to the past. Sluggish activity on the front of PSU also resulted in declining orders for the company.

However, it is expected that the company will benefit from the Ministry of Petroleum and Natural Gas. The ministry has proposed various projects with huge target of nearly Rs 1.2 trillion in the 12th five year plan. This will help the company bag some of the big orders which will result in rising inflows/revenue. Also the company shall be enjoying healthy margins for the consultancy business space, which will help the company post huge profits.

At the current level, the stock looks attractive but could under perform to some extent, until clarity on probable equity dilution/FPO is received. Long term business prospects of the company looks positive and company has strong fundamentals. Also as per the valuation of the company it is expected that the stock will see the levels of INR 230.

Tremendous Business Opportunities

The Company is expecting to generate huge revenue from consultancy business in hydrocarbon segment in FY14. The LSTP segment however will show moderate growth. LSTP or the Lumpsum Turnkey Projects segment division has lower margin as compared to the consultancy business segment. It is expected that there will be a gradual rise in capital expenditure in Hydrocarbon sector by various PSUs. This will help the company drive its revenue from FY14 onwards.

As far as FY13 is concerned, the company has bagged majority of the orders in its consultancy division.  The trend I expected to continue, which clearly infers that there is a likely expansion in YoY margin in FY14.

Talking of the past, the company has established a near monopoly position in the industry and has strong relation with the major hydrocarbon players which includes HPCL, BPCL, IOCL etc. As far as the expertise is concerned, the company has commendably developed indigenous technology and expertise for offshore platforms, refining and several other petrochemicals project. The Ratnagiri refinery project of HPCL with estimated cost of Rs 350 bn could entail consultancy opportunity of nearly Rs 15 to Rs 20 bn for the company. In the recent orders, Engineers India Ltd. has secured Rs 7.2 bn Consultancy service contract from BPCL for Integrated refinery expansion project, Kochi.

Read more about Oil & Gas Companies in India.

In the overseas business as well, the company continues to win orders in international geographies mainly Middle East and it is expected to get further momentum in FY14.

Strong Financials

As far as the financials are concerned, company is expected to report moderate revenue growth in FY14 due to slower growth in LSTP division. However growth in the years thereafter will be high due to big consultancy projects.

EIL has a strong debt free balance sheet with net cash of Rs. 60 per share. Lower Capex and negative working capital will definitely help the company boost its free cash flow in future. An expectation of margin expansion on account of increasing proportion of consultancy business revenue will help the company grow at a acceptable rate.

Currently the stock is trading at 8.5x P/E and 5.0x EV/EBITDA multiples. I believe the stock is attractive at the current level and an upside of nearly 30% is expected. Thus we recommend a ‘BUY’ for the stock.